More Legal Trouble for FCC’s Open Internet Order & Net Neutrality -- Part 29 FCC Open Internet Order Series

The D.C. Circuit Court of Appeals 3-0 decision to overturn the FCC in Comcast v. FCC/Tennis Channel spells more trouble for the ultimate legality of the FCC’s Open Internet Order. That decision spotlights that three additional D.C. Circuit Appeals Court’s judges do not agree with the FCC’s reading of the law and the facts concerning lawful network discrimination.

On the margin, this new decision should make Verizon more confident and the FCC less confident in the outcome of Verizon v. FCC.

Overall, I believe Verizon remains more likely than not to prevail in its challenge of the FCC net neutrality regulations in the FCC’s Open Internet Order, because Verizon only needs to prevail with one of its many strong arguments while the FCC must win on all of them.

How is this latest D.C. Circuit decision relevant to the FCC Open Internet order case?

First, there are now six of the fourteen D.C. Circuit judges that so far are known to disagree with the FCC’s interpretation of the law concerning regulation to prevent “discrimination” by ISPs. In the seminal 2010 Comcast v. FCCdecision, three D.C. Circuit judges (Tatel, Sentelle, and Randolph) ruled the FCC did not have the authority to regulate ISP network management practices to prevent discrimination. In this 2013 Comcast v. FCC & Tennis Channeldecision, three additional D.C. Circuit judges (Williams, Kavanaugh, and Edwards) ruled that the FCC did not present substantial evidence that Comcast had in fact discriminated against the Tennis Channel as the FCC had concluded.

Second, this latest case is relevant because all three cases, (Comcast v. FCC; Comcast v. FCC/Tennis Channel; and Verizon v. FCC) implicate the same core issue: the legal limits of the FCC prohibiting discrimination in the marketplace of today.

Third, the D.C. Circuit Court ruled in this latest case that the FCC “has failed to identify adequate evidence of unlawful discrimination” and called some of the FCC’s discussion “mere handwaving.”

This latest case is relevant because the FCC’s evidence of a discrimination problem in the Open Internet Order is arguably as thin as the FCC’s evidence was in defending its finding of discrimination in its Tennis Channel decision. The FCC’s evidence of an Open Internet problem, which the FCC defines as “Broadband providers have acted to limit openness,” is very thin. The FCC offers only three paragraphs of examples (paras 35-37) with no discussion or evidence that these alleged incidents are in fact unlawful discrimination or unreasonable, or have caused any consumer harm.

If the Court approaches Verizon v. FCC like the Court approached Comcast v. FCC & Tennis Channel, i.e. expecting the FCC to be able to prove there is a problem requiring rectification, the FCC is in trouble because it does not have any substantial proof of ISPs limiting “openness.”

The D.C. Circuit’s logical focus on the evidence of a problem inevitably opens a Pandora’s Box of additional problems for the FCC’s Open Internet Order.

When the Court probes for the FCC’s method of collecting evidence of the problem, it will become clear that it is largely anecdotal and not substantial. Potentially more problematic for the FCC is that the FCC did no formal competition analysis, no market power analysis, and no cost benefit analysis to substantially prove that an actual “limiting openness” problem exists.

Furthermore, when the Court focuses on the problem that the FCC has specifically identified in its order, that broadband providers are limiting “openness,” it is logical for the Court to then inquire where the FCC’s statutory authority is to promote or preserve Internet “openness,” a term which the FCC referred to more than 100 times in its order.

“Openness,” the term and goal that is foundational to the FCC’s case is not found in the law, or the FCC would have pointed to it and they have not. If the Court requires the FCC to lawfully and reasonably interpret existing legal terms in the law, how much patience will the Court have for the FCC interpreting a term and purpose that the FCC essentially has made up and that is not found in law or in the legislative colloquy?

Fourth, Judge Kavanaugh’s concurring opinion in the Comcast v. FCC/Tennis Channel case indicates there is also a big legal minefield that the FCC does not want to enter, in broadly applying a new “unreasonable discrimination” standard that is naturally dependent on established precedent and law.

Judge Kavanaugh argued that applying a non-discrimination statute to a company “that lacks market power not only contravenes the term terms of the statute, but also violates the First Amendment as interpreted by the Supreme Court.”

This line of legal analysis is highly relevant to the FCC Open Internet order because the FCC’s Open Internet order spotlights the specific term “unreasonable discrimination” thirty-three times as a core problem the FCC is regulating.

Judge Kavanaugh’s analysis that the term “unreasonable restrain” in Comcast v. FCC/Tennis Channel “incorporates traditional antitrust principles” suggests that the FCC’s analogous “unreasonable” discrimination/restraint standard in the FCC Open Internet order could expect to get the same “traditional antitrust principles” analysis from the D.C. Circuit Court.

If it does, it is more trouble for the FCC. As the FCC has previously ruled, ISPs offer an “information service,” which through an antitrust law lens is essentially a vertically-integrated service of transport, processing, storing and receiving, among other services. Judge Kavanaugh stated “beginning in the 1970’s… the Supreme Court has recognized the legitimacy of vertical integration and vertical contract by firms without market power.”

If the panel that hears Verizon v. FCC goes down Judge Kananaugh’s path, the FCC Open Internet order is particularly vulnerable because the FCC did no market power or competitive analysis to justify the Open Internet order. Moreover, obvious known competitive facts indicate that ISPs do not have market power as the FCC assumes.

Judge Kavanaugh’s Comcast v. FCC/Tennis Channel reminds us that the D.C. Circuit court is keenly aware of how competitive communications markets have become since existing law was originally written. That’s even more trouble for the FCC’s case.

A much under-appreciated Achilles heel of the FCC’s assumed sweeping power to regulate ISPs is its reliance on law that was written when telecom and cable companies were actually monopolies, compared to now when the competitive facts are obvious that they are no longer monopolies. (Telcos have lost two thirds of their voice market share and cablecos have lost 40% of their video market share.)

Simply, for the FCC to prevail in Verizon v. FCC, they have to convince the court to ignore the competitive facts of today (that they are well aware of), and to ignore that the FCC did not do a necessary competitive and market power analyses to justify such a new sweeping regulatory scheme.

Net neutrality activists and the FCC assume ISPs have market power, but they fear they cannot prove it in a court of law under longstanding antitrust precedent, because the facts and precedent don’t support their assumption.

Fifth, Judge Kavanaugh argued that it was his opinion that claiming a company unlawfully discriminated when it did not have market power, “also violates the First Amendment as it has been interpreted by the Supreme Court.”

This is relevant to the FCC Open Internet Order, because proponents of net neutrality immediately found Judge Kavanaugh’s analysis threatening to net neutrality and the FCC Open Internet order. Tellingly, Professor Susan Crawford wrote a Bloomberg op-ed the next day that “the court should resist this [Kavanaugh] reasoning, or risk trivializing the freedom of speech that the First Amendment truly protects.”

Obviously the net neutrality movement is very threatened by an Appeals Court Judge spotlighting this seminal Supreme Court one-sentence-quote on the First Amendment: “the concept that government may restrict the speech of some elements of our society in order to enhance the relative voice of others is wholly foreign to the First Amendment.” Buckley v. Valeo (1976)

Why net neutrality activists freak out about any possibility of ISPs being found by a court to have First Amendment rights is that they know their real purpose behind promoting net neutrality is all about “restrict[ing] the speech of some elements” (companies) “to enhance the relative voice of others” (theirs). Net neutrality activists have long tried to transmogrify the perception of the First Amendment to mean equality of speech (“all bits are created equal”), not constitutionally-protected freedom of speech.

These activists also are well aware than newspapers, broadcasters and cable companies all enjoy First Amendment protection under established constitutional precedents. They are terrified that ISPs will be ruled by the court to enjoy First Amendment protection as well.

Since net neutrality activists have long branded net neutrality as all about freedom of speech and as the “first amendment of the Internet,” they know that an official First Amendment court precedent for an ISP would be among the most devastating legal and political setbacks their movement could suffer. It would expose their whole manufactured, free-speech-justification for net neutrality as a grand messaging scam.

Now I don’t believe the court will need to reach constitutional issues like the First Amendment to overturn the FCC in Verizon v. FCC, because the order is so vulnerable on the facts and on exceeding the bounds of its statutory authority.

However, if the court somehow reaches the First Amendment argument, I believe the court would be likely find that Verizon and ISPs enjoy some level of First Amendment protection because they share clear characteristics of other companies and functions that have already been afforded some First Amendment protection, and because importantly, ISPs do not have market power.

In addition, if the Court reaches the First Amendment issue, this outcome is also more likely than not to favor Verizon because of the May 7th D.C. Circuit Court of Appeals decision in NAM v. NLRB where that court ruled that the NLRB unconstitutionally infringed on companies First Amendment right to free speech by compelling speech.

Lastly, Judge Edwards’ concurring opinion in Comcast v. FCC/Tennis Channel has a discussion of Chevron deference that has relevance to Verizon v. FCC since it: comes out just after the Supreme Court’s reaffirmation of Chevron Deference in Arlington v. FCC; the FCC touted the SCOTUS ruling on Arlington v. FCC to the D.C. Circuit in defense of its Open Internet order; and Judge Edwards Chevron analysis has applicability to the circumstances surrounding the FCC Open Internet order.

Since the FCC is widely believed to need generous Chevron deference in order to prevail in Verizon v. FCC, it is very relevant to hear the views of one of the most senior judges on the D.C. Circuit Court of Appeals about how Chevron deference does not apply to a case where the FCC is seeking to regulate ISPs to prohibit “unreasonable discrimination.”

Interestingly Judge Edwards cites three cases (p.10 of his concurrence) and instances where the FCC is not due Chevron deference. Tellingly, all three instances could apply to the facts of the FCC Open Internet order as well.

In the first instance he said the FCC is due no deference if it has “under the guise of interpreting a regulation [created] de facto a new regulation.” (The FCC is now implementing its broadband policy statement on net neutrality principles in the FCC Open Internet order).

In a second instance, no deference is warranted if the FCC “subjected a party to ‘unfair surprise.’” (The FCC had previously and repeatedly unanimously ruled that broadband service was an unregulated “information service,” and based on that foundational regulatory consensus, ISPs invested many tens of billions of dollars in long-term infrastructure capital investment. Now the FCC is conveniently saying oops! -- a majority of the new FCC commissioners think it is a new regulated “Broadband Information Access Service”).

And in a third instance, no deference is due when an agency “flip-flops.” (The FCC is engaged in a full “flip-flop” here by first saying Section 706 does not confer direct statutory authority several years ago, and now conveniently claiming the opposite that it does).

Conclusion:

Verizon v. FCC is widely appreciated to be the single most important pending court decision for the FCC and the communications/Internet sector.

Given its import, it is important to study any potential analogous cases to Verizon v. FCC for any insights on how the D.C. Circuit is likely to rule on Verizon v. FCC. As this particular analysis has shown, the Comcast v. FCC/Tennis Channel discrimination case has substantial relevance to the Verizon v. FCC no unreasonable discrimination case.

How would I summarize what we know at this point?

The FCC is likely wrong that Chevron deference is carte blanche.

The FCC is likely wrong on the facts that there is a demonstrable problem of broadband providers limiting Internet openness.

The FCC is likely wrong in not adequately investigating the facts of ISP competition and potential market power, prior to preemptively price regulating ISPs.

The FCC is likely wrong on the facts that ISPs actually have the market power to unlawfully discriminate.

The FCC is likely wrong that the FCC has statutory authority to regulate ISPs to prohibit unreasonable discrimination.

The FCC is likely wrong that ISPs with no market power, have no First Amendment rights.

At bottom, Verizon must win just one of its arguments in Verizon v. FCC to win, whereas the FCC must prevail on all.

My overall view is that Verizon is more likely than not to win at least one of the above arguments and has a very good shot at winning on multiple arguments, if the court decides to reach them.